Charting the Growth of Human Rights and Ethical Reporting in the EU

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Increasingly, businesses across Europe must report on a wide range of ethical and related matters in addition to publishing their financial results.

Takeaways

  • Requirements for businesses to undertake non-financial reporting have been steadily increasing across Europe for some time.
  • Companies caught by applicable regulations must disclose against a wide range of topics including human rights, diversity and anti-corruption.
  • Disclosure typically extends beyond the enterprise to cover supply chains as well.

European businesses must undertake a range of non-financial reporting so as to address human rights, corruption and other social and ethical issues. This Alert examines, from an EU-wide, and a UK perspective, the key non-financial reporting obligations currently in force.

Non-Financial Reporting Directive
The Non-Financial Reporting Directive 2014/95/EU (the NFR Directive) expands the non-financial reporting requirements of EU Directive 2013/34/EU on the annual financial statements, consolidated financial statements and related reports of certain types of undertakings (known as the Accounting Directive) by inserting a new Article 19a into it, as well as seeking to harmonise EU-wide corporate reporting requirements.

The European Commission’s view is that the disclosure of information on the way large companies “operate and manage social and environmental challenges … helps investors, consumers, policy makers and other stakeholders to evaluate the non-financial performance of large companies and encourages these companies to develop a responsible approach to business.”

Public Interest Entities
Article 19a applies to large undertakings (those with more than 500 employees on average during the financial year) who are also public interest entities (PIEs) who, for financial years beginning on or after 1 January 2017, must include in their management reports a non-financial statement which “to the extent necessary for an understanding of the undertaking’s development, performance, position and impact of its activity” describes, as a minimum:

  • environmental matters. This should include the impact of the company’s business on the environment,
  • social responsibility and treatment of the company’s employees,
  • respect for human rights,
  • anti-corruption and anti-bribery matters, and
  • diversity on company boards. This should cover age, gender educational and professional background.

PIEs are defined as listed companies, credit institutions and insurance undertakings, as well as companies specifically designated by a Member State as a PIE. The European Commission has estimated that around 6,000 companies across the EU will be classified as PIEs. Their statements should describe their business models as well as:

  • human rights, anti-corruption etc. policies and outcomes relating to those policies,
  • due diligence processes,
  • principal risks,
  • (where relevant and proportionate) the business relationships, products or services that are likely to cause adverse impacts,
  • how those risks are managed.

Supply Chain Disclosures
Non-financial statements should also include disclosures about supply chain matters. Recital 8 of the Directive states that “…risks…may stem from undertaking’s own activity or may be linked to its operations, and where relevant and proportionate, its products, services and business relationships, including its supply and subcontracting chains.”

Guidance published by the European Commission earlier this year clarified that information about principal risks, and how they are mitigated, should include, where relevant and proportionate, material information about supply and subcontracting chains. Per the guidance, such information “may reflect how a company approaches, among others, the OECD Guidelines for Multinational Companies, the UN Guiding Principles on Business and Human Rights, and relevant industry-specific frameworks such as the FAO-OECD Guidance for Responsible Agricultural Supply Chains.”

In-Country Implementation
As with all EU Directives, the NFR Directive had to be implemented into local law by each EU Member State. In the UK, this was done through the Companies, Partnerships and Groups (Accounts and Non-Financial Reporting) Regulations 2016 which took effect as an amendment to the Companies Act 2006 from 1 January 2017. The disclosed information can also be contained within a separate document.

PIEs can have relatively wide discretion as to how to set out their non-financial statements and can follow international, European or national guidelines, including the UN Global Compact, the OECD Guidelines for Multinational Enterprises and ISO 26000, the international standard on social responsibility. Further information can be found in this helpful factsheet by the Financial Reporting Council (FRC).

The NFR Directive was a “harmonization” Directive intended to impose minimum standards across the EU, rather than impose new obligations. In the UK, the disclosure requirements under the NFR Directive largely mirror the existing Strategic Report and Directors’ Report regulations applicable to quoted companies and the companion guidance from the FRC; however the areas of anti-corruption and anti-bribery are new.

Other Non-Financial Disclosure Requirements
In addition to the NFR Directive:

  • listed companies are subject to mandatory reporting of their greenhouse gas emissions, in accordance with the Strategic and Directors’ Reports Regulations; and
  • large companies with UK operations whose turnover is £36 million or more, must publish an annual slavery and human trafficking statement on their website in accordance with the Modern Slavery Act 2015 requires company boards to approve and publish an annual slavery and human trafficking statement on their website.

Comment
Non-financial reporting is here to stay, and its remit is likely to grow in time. Investors appear to share the Commission’s views on the importance of such disclosures, which may help to drive, or at least encourage, a longer-term investment horizon. These ethical disclosure requirements mean that businesses should continue to focus on ensuring that they have adequate policies and procedures in place, addressing the relevant issues, as well as communication and training plans, and supply chain assessment and management tools and techniques, including robust due diligence and contracting processes. Companies should also explore how technology can assist with the mapping of business and product lines, analysis of associated data and transparency of supply chains.

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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